Adobe plunged almost 17%, value buy or trap?
Adobe ( $Adobe(ADBE)$ ) plunged almost 17% on Thursday when it reported its earnings. This was in addition to the market's reaction on its $20 billion deal on acquiring Figma, a collaborative design platform developer, in a half cash, half stock in which Figma's employees would receive 6 million additional Adobe restricted stock units that will vest over four years from closure of the deal.
Adobe expects Figma to add to the company's earnings by the third year of the after the deal's completion, and it suggests that Adobe's earnings would see a negative impact for two years.
Additionally, Adobe guided their fourth quarterfiscal 2022 revenue to $4.52 billion and EPS of $3.50 per share, while analysts had expected$4.6 billion and $3.47 EPS.
In terms of earnings estimates from analysts, they expect Adobe to continue to grow its revenue in the low teens six to eight quarters.
What the chart says
The stock had plunged so much that we have to go to the weekly chart to find the levels of support. Looking at the chart, the current price sits around levels back in March 2020 during the covid 19 plunge. The likely support areasare around $290, although anything south of $275 could mean more pain.
Ratios and Valuation
Adobe's current price to earnings GAAP (TTM)is now at a 3 year low of 30, while price to sales is at 8.78.
In terms of its intrinsic value, Morningstar rates Adobe as a 5-star with fair value at $500. That is a significant discount of 38% with hugemargin of safety, and Adobe has a wide economic moat, with medium uncertainty of hitting its fair value target.
Given the attractive ratios and discount from its fair value, Adobe looks attractive at its price after the plunge. However, if you are lookingfor a bigger margin of safety, anything less than $290 will be very attractive. Investors might also wait after the next Federal Open MarketCommittee meeting on September 20-21 before committing capital in this stock.
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